The Biden administration unveiled its fourth major student loan forgiveness program last week. Although the government’s last three rollback plans have failed in court, officials apparently hope things will be different this time.

The new plan offers loan forgiveness to borrowers in difficulty. If you’re wondering what “hardship” means, I am too. It’s unclear who would be eligible for loan forgiveness under the latest program, and much of it is left to the subjective determination of Department of Education (ED) bureaucrats. If these bureaucrats adopt a maximalist definition of “hardship,” the new plan could easily be the most expensive the administration has ever proposed.

When ED officially publishes the loan forgiveness plan in the Federal Register, the public will have 30 days to submit comments. ED must then read and consider these comments, revise the plan where appropriate and finalize it next year. The process will likely extend beyond Inauguration Day, meaning Tuesday’s election could determine the ultimate fate of the loan forgiveness plan.

What does the latest loan forgiveness plan contain?

The latest plan takes a two-pronged approach to loan forgiveness. Half of the program would automatically provide relief to current borrowers who ED says are likely to default on their loans. The second half would allow current and future borrowers to request loan forgiveness citing “hardship.” Let’s take a closer look at each of the two parts of the plan.

Automatic cancellation: The auto-undo component is more defined. The Secretary of Education would conduct a “predictive assessment” to determine which borrowers are at least 80% likely to default on their loans over the next two years. Borrowers in the probable default category would automatically receive loan forgiveness.

Unlike the Biden administration’s initial proposal, which capped forgiveness at $10,000 or $20,000 per borrower, ED would likely forgive the entire loan balance for those affected. The new proposal states that ED will “adopt a rebuttable presumption that the full amount would be eligible for waiver” because “we believe full relief would be warranted in the majority of circumstances.”

Cancellation based on request: ED will automatically cancel the debt once. However, future borrowers, as well as current borrowers who do not automatically receive relief, can take advantage of the second half of the program at any time. This component would allow borrowers who claim to be experiencing “difficulty” to submit a request for debt cancellation. The applications would allow borrowers to explain their “difficulties.” Again, it is likely that most borrowers who seek relief through the application process will have their debts erased entirely.

How would ED determine “hardship”? It’s not clear. In theory, the borrower’s hardship should lead to “serious and persistent adverse circumstances,” in which “other payment relief options would not sufficiently address the borrower’s continuing hardship.” This is of course very subjective. ED’s proposal provides a list of 17 factors that could indicate hardship, but the list is not exhaustive: there is also a catch-all provision that allows for consideration of “any other indicator of hardship identified by the Secretary “. In practice, the question of whether a borrower is “distressed” and deserves relief is left to the subjective assessment of ED bureaucrats.

How much would the new plan cost?

The Department of Education’s regulatory impact analysis estimates that the agency would automatically forgive the debt of about six million borrowers, or about one-sixth of the total. The demand-driven component would forgive the debts of an additional 1 million borrowers today, as well as 1 million future borrowers over the next decade. ED figures put the fiscal cost of the program at $112 billion: $70 billion for automatic cancellations and $42 billion for on-demand cancellations.

But there are many reasons to believe that this is a considerable underestimate. Past analyzes of ED have lowball the costs of its loan forgiveness programs using unrealistic assumptions (for example, assuming borrowers will apply at incredibly low rates). The danger of underestimation is even greater here. Subjective decisions will govern the extent of cancellation, particularly for the application-based component of the program.

Many questions concern the definition of the term “difficulties”. Where will ED bureaucrats draw the line? For example, ED’s proposal states that loan forgiveness is warranted when “the hardship is likely to harm the borrower’s ability to repay the federal government in full.”

But millions of borrowers are not expected to repay their loans in full because they are scrambling to get their loans forgiven through Public Service Loan Forgiveness (PSLF) or repayment income-based (IDR). Will borrowers in this situation be able to benefit from immediate cancellation of their loan? Borrowers collectively holding $740 billion (nearly half of the federal loan portfolio) are enrolled in IDR plans. Theoretically, by ED’s standards, most of this money could be canceled immediately.

ED says it will “conduct a factual analysis of individual borrowers” ​​to rigorously grant loan forgiveness only to applicants who actually need it. But no serious person should take them at their word. Political reality would push ED to approve almost all loan forgiveness requests. Concrete example: the ministry has approved over 98% of applications it has processed for borrower defense to repayment, another loan forgiveness program.

Other concerns about ED’s loan forgiveness plan abound. Essentially, ED has no way of verifying whether the information it receives in applications seeking to support hardship claims is actually true. Help might not go to the neediest applicants, but rather to the most gifted creative writers. Moral hazard is another concern, since a borrower’s “repayment history” is a factor in hardship (i.e., if you fail to make your loan payments, it indicates that you are in difficulty). It should be obvious that rewarding applicants who fail to repay their loans on time could go wrong.

The official cost estimate also assumes that one of ED’s other loan forgiveness programs, the SAVE plan, will be in effect, even though courts have repeatedly said blocked he. If the SAVE plan disappears, fewer loans will be forgiven as a result, which likely means more debts forgiven under the new proposal.

For these reasons and others, independent analysts estimate that the cost of ED’s new loan forgiveness program could be much higher than the administration claims. The Commission for a Responsible Federal Budget think its cost could reach $600 billion, making the new plan more expensive than any other plan proposed by the Biden administration. But the group’s analysts warn: “As there is no limiting principle to this provision in one direction or the other, its potential costs are therefore almost unlimited.”

What’s next?

The new plan faces an uncertain future. If ED fails to finalize the proposal before Inauguration Day, and if the next administration is not supportive, the plan will never see the light of day. Even if the rule is finalized, state governments will likely challenge it in court — and past experience suggests they will prevail. But even if its chances of implementation are slim, the immense cost of the Biden administration’s exit loan forgiveness program means it’s worth taking seriously.